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Example #3 New Project Analysis You have been asked by the president of the Farr Construction Company to evaluate the proposed acquisition of a new

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Example \#3 New Project Analysis You have been asked by the president of the Farr Construction Company to evaluate the proposed acquisition of a new earth mover. The mover's basic price is $50,000 and it would cost another $10,000 to modify it for special use. Assume that the mover has a MACRS 3-year recovery period. It would be sold after 4 years for $20,000 and it would require an increase in net working capital (spare parts inventory) of $2,000. The earth mover would have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 40 percent. A. What is the net cost of the earth mover? B. What are the operating cash flows? C. What is the terminal (nonoperating) cash flow? D. If the project's cost of capital is 10 percent, should the earth mover be purchased? part A - calculate the initial cash flow part B - calculate all of the operating cash flows part C-calculate the terminal cash thow part D - calcuiate BOTH the net prosent value (NPV) and the internal rate of return (IRR) Base your investment decision on BOTH the NPV and the IRR

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